Section B - Case 1 (NovaStream Ltd)

NovaStream Ltd, a UK tech startup providing cloud services, purchases specialized server maintenance software from a company based in the USA for £5,000.

How should NovaStream Ltd account for VAT on this transaction on its UK VAT return?

Answer options:

Ignore it, as the supplier is outside the UK.

Pay £1,000 to US Customs.

Apply the reverse charge: declare output VAT of £1,000 and claim input VAT of £1,000 (assuming fully taxable supplies).

Only declare output VAT of £1,000; it cannot be reclaimed.

How to approach this question

Recognize this as an import of services (B2B). Apply the reverse charge mechanism.

Full Answer

C.Apply the reverse charge: declare output VAT of £1,000 and claim input VAT of £1,000 (assuming fully taxable supplies).✓ Correct

When a UK VAT-registered business purchases standard-rated services from an overseas supplier, the 'reverse charge' applies. NovaStream Ltd must account for output VAT on the £5,000 purchase (£5,000 x 20% = £1,000) in Box 1 of its VAT return. It can simultaneously reclaim this £1,000 as input VAT in Box 4, assuming the software is used to make taxable supplies. The net effect on VAT payable is nil.

Common mistakes

Thinking imported services are outside the scope of UK VAT entirely.

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